Investment Bulletin:
May 2021

This month:

Experts put inflationary fears under the microscope and explain how infrastructure and commodities could offer investors robust protection and the chance for outsize returns if they opt for certain kinds.

Expert investment views:

Inflationary fears are put into perspective, with an eye on the equity sectors likely to benefit should it rachet up

Infrastructure’s attractions are explained, including its modern incarnations in communications and data

A strong case for commodities is put forward, but with an emphasis on agriculture, rather than energy and metals

Featuring this month’s experts:

1. Inflation – what’s the outlook?

Insights from:

The question with inflation is not how high it will go but how long it will stay there. With supply bottlenecks, we think we will see an eye-watering spike in prices in the next two or three months, but the idea that inflation will spiral misunderstands the structural factors that have kept it low for multiple cycles – demographics, technological productivity and internet shopping. The pandemic has also contributed, with technical and social changes, which could keep a lid on cost and wage increases. 

With supply bottlenecks, we think we will see an eye-watering spike in prices in the next two or three months, but the idea that inflation will spiral misunderstands the structural factors that have kept it low for multiple cycles – demographics, technological productivity and internet shopping

The Fed is focused on full employment – for those affected by the pandemic – so the notion that interest rates will rise again seems ill informed. But over heating is possible, as considerable pent-up demand will make next year’s growth very strong. 

So how do we position portfolios for inflation? A little is good for equities. It’s only when it spirals out of control – 4-5% – that it detracts from equity returns. Value sectors are the ones that should benefit from inflation – commodities, energy, industrials, financials. 

Canaccord Wealth Management - Michel Perera

Michel Perera

Chief Investment Officer at Canaccord Genuity Wealth Management

2. Examining the case for infrastructure investments

Insights from:

For well over a decade, we have invested in infrastructure for our clients, to diversify their portfolios and improve risk-adjusted returns. As an asset class, it offers many of the qualities they seek – good levels of income, particularly when held inside tax wrappers; relatively stable capital returns, with typically lower volatility than equities; and a high degree of inflation protection, which is usually contractually based at an underlying project level.

There have been numerous developments and additions to this growing asset class in recent years, with the most recent being digital infrastructure.  We have accessed this for our clients via two recent investment trust IPOs, Cordiant Digital Infrastructure and D9 Digital Infrastructure; they both invest in the “plumbing of the internet” – data centres, land-based or sub-sea fibre-optic networks, mobile communications towers and other assets that help to improve the speed, reliability and availability of the internet.

Undoubtedly, as a society we are increasingly dependent on communications and data; it is, therefore, very encouraging that there are now investment vehicles available to give our clients exposure to this critical modern infrastructure 

Undoubtedly, as a society we are increasingly dependent on communications and data; it is, therefore, very encouraging that there are now investment vehicles available to give our clients exposure to this critical modern infrastructure, hopefully in a manner that is consistent with the pattern of returns we have enjoyed from traditional infrastructure funds.

Investec - Patrick Doig

Patrick Doig

Senior Investment Director at Investec Wealth and Investment

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Top Tip

With the world in such a state of flux, it would be easy to focus wholly on risk and thereby miss out on the rewards the investment landscape presents. Let us arrange some
no-obligation discussions with wealth managers so that you can ensure you are balancing both sides of the equation to exploit the kinds of opportunities our experts describe this month.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

3. Consider commodities to capture the bounce-back

Insights from:

Commodity investments are ones that we’re extremely excited about at the moment and have recently increased the allocations to within our clients’ portfolios. We believe the outlook here is very bullish, predicated on increasing demand (as economies re-open and pent-up demand gets unwound) and tight supply; current inventory levels are extremely tight in certain markets due to the consequences of COVID.

In addition to this, commodities bring good diversification elements to portfolios, with near zero long-term correlations to equities and bonds helping to improve the risk/reward trade off that one gets when including them. After many years of weak performance, the asset class (despite decent inflows this year) remains under-owned and could well benefit further from investor flows, should inflation concerns continue to rise.

Although metals and energy tend to garner most of the headlines when one reads about commodities, it’s actually the high weighting (c.30%) to agricultural commodities that we’re most bullish on, with low planting (due to COVID restrictions) resulting in low crop yields that are being tightly bid up as life returns to normal

We favour an active approach, but benchmarked to the Bloomberg Commodity Index which is very diversified within itself – with 23 different commodities split across six sectors.

Although metals and energy tend to garner most of the headlines when one reads about commodities, it’s actually the high weighting (c.30%) to agricultural commodities that we’re most bullish on, with low planting (due to COVID restrictions) resulting in low crop yields that are being tightly bid up as life returns to normal. This dynamic makes for favourable futures curves which further strengthen the case for owning commodities as a decent way of protecting against inflation, as well as capturing and reflecting the bounce-back in economic growth that we envisage.

Investment Tips, Investment

Rory McPherson

Head of Investment Strategy at Punter Southall Wealth

Important information

The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.

We always advise consultation with a professional before making any investment and financial planning decisions.

Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.

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